Friday, March 09, 2012

Update On China’s Economic Miracle

China has been a central focus on here since starting this blog seven years ago.  To my knowledge we were the first in the financial community to write about the coming bust in China.    And, our focus is substantially different than those who in the last few years have started to recognize that a real estate crisis was brewing in the country.    Those are people who think with their eyes.  But, at least they are thinking.  As we have noted numerous times, China’s crisis is far more ominous than real estate.  They are experiencing a capital bubble. 

Over the years we have discussed some very worrisome issues and possible outcomes in China including that GDP could literally collapse by as much as 50%.  People who think with their eyes impatiently believe that the world must reveal itself immediately or your work isn’t accurate.   Time is an element that is nearly impossible to understand for anyone.  And, the status quo is doing anything and everything to stall the inevitable.  But, the train is still coming down the tracks.  All one can do is use their voodoo wands and try to estimate time dependency.   But, now, even the World Bank, a tool of U.S. financial manipulation and hegemony, has issued a stern warning to China to reform or collapse.   That warning is far too little, too late.  (More on the World Bank’s statement in a future post.)

I suppose most people have seen that the Chinese economy has started cracking substantially in the last few months.    Real estate is literally collapsing as are some measurements of industrial production.  While accurate data out of China is difficult to obtain, after the 2008 collapse we saw what was estimated by some data sources to be one hundred thousand factories, or possibly even hundreds of thousands of factories, close, the stock market collapse (we said it would just before it did)  and coinciding with those dynamics, the real estate bubble hit what I would classify as escape velocity.   That dynamic was no coincidence as we have noted numerous times.  We have written that the increased output in automobiles, housing and real estate was a sign that the capital bubble had collapsed.  And, that meant money creation would rotate into consumption items until that bubble was then pricked.   At which time the unraveling would begin.   In other words, as we noted numerous times, the frenzied housing and auto markets in China were key indicators that the economy was actually collapsing.  Not exactly how it has been reported in the mainstream economics or financial community.

With China’s wild downward swings in real estate, we can now most likely guess that 2012 will be the end of the world for China’s supposed miracle economy.  Some anecdotal evidence of this coming upon us very quickly is that warehouse copper stocks in China have increased from 50,000 metric tons to about 212,000 metric tons since December.  In other words, demand for copper is collapsing and supply is rising rapidly.  This as Wall Street has ramped copper prices back into the stratosphere again.  I wonder if JP Morgan is still hoarding physical copper?  -->  Life’s a bitch and then you die.  As part of our long time writings about the coming commodities bust, I anticipate copper is going to easily fall as much as 95% from its peak. 

China’s stimulation of its own economy to replace the lost international demand for China’s goods after the 2008 collapse has done nothing other than create the largest run up in real estate prices the world has ever seen.   Now that this centrally-planned nonsense is collapsing it appears the communists want to extend even more credit to international customers.   But, as we have noted countless times over the last half dozen years, the yuan is worthless.  The communists just don’t realize it yet.  Neither does Jim Rogers who we mocked for moving to China just as their economy started its implosion.   (Rogers believes the U.S. is finished versus our long term thesis is the U.S. is going to rise again.  So, he moved to China so his kids could learn Mandarin.  Well, I wish I could speak Mandarin but not because the future of economics is going to be driven by communist central planners.  That is never going to happen.)   A fool and his money soon part ways.   That includes both China for extending more credit to international customers and Jim Rogers for being economically-illiterate.   China is repeating its past mistakes of extending international credit to fuel its bubble economy; the same mistake the U.S. made as one of the causational factors in the Great Depression.  (Remember, as we discussed a few years ago, I expect the U.S. could very well either monetize or default on its foreign debts in 2013.   As it pertains to China,  I think we can expect the national mood to be such that a default is quite possible.  How wonderful that will be for globalization.  But, as we have uniquely noted for the last five calendar years, globalization is dead.  Now we just wait for the status quo to run out of ideas on how to spend other people’s money to save it.)

This all reminds me of a discussion I had with a PhD (Piled Higher & Deeper)  in economics and top model builder at a leading U.S. hedge fund some years ago.   Nice enough man consumed by his own faulty belief system as we all are.  When I politely tried to intimate to him that everything he believed to be true about his models and economics was going to fail and that including the Chinese economy, the global economy, commodities and his financially-engineered juju, he essentially remarked that I had no idea what I was talking about.  That he had been doing this for twenty years.  And that China would effectively manage its economy essentially because the economics profession was full of brilliance unlike little old me.  We as human beings are capable of tremendous self-delusions and rationalizations.   Soon thereafter his world started to crumble.  Now we are going to put the finishing touches on his and countless others’ completely failed belief systems. 

The final spikes are soon to be nailed in the coffin before we lower it into the grave.  On the grave’s headstone will read “Here lies the failed belief systems and institutions of the ego that the fraudulent status quo once called the Chinese economic miracle, free markets, financial engineering, the investor class and globalization.  These beliefs, fortified by primary interests in and of the self, greed and narcissism led to the  global exaltation of the self and an associated mania.   As is always the case in the exaltation of the self, it was then followed by unprecedented misery, poverty, corruption and eventual collapse.”.  RIP.

Then……..  at some point we build a new world.   A better world.  That is, if we can keep the status quo from starting World War III as the final manifestation of the exaltation of the self;  the dehumanization of society’s values followed by the institutionalization of the murder of our fellow man.  As we have noted many times,  Joseph Schumpeter remarked that we need to rid ourselves of the status quo from positions of authority to move beyond the crises they create.  And, that is what we are seeing around the world today.  That dynamic is far from over.

All of the other outcomes regarding China we wrote about over the years are likely to start manifesting themselves to some degree in the coming year.  The communist party is already starting to crack down on freedoms as we said they would years ago.   This is obviously motivated by fear of loss of control as the economic monster they created starts to unravel.

The world continues to unfold exactly as we have said it would.  The cycle of volatility remains in full force. 

posted by TimingLogic at 10:58 AM

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